Why The Strong Apartment Market Is Hurting CoStar's Bottom Line

The recovery of the U.S. apartment leasing market this year has been welcome news for landlords, but it has inflicted harm upon the real estate industry's largest provider of data and listings. 

The apartment market has reached such high occupancy levels that landlords are reducing their spending with CoStar Group's Apartments.com platform because they have few available units to advertise, a trend that hurt CoStar's revenue last quarter and tanked its stock price Wednesday. 

CoStar Group, on an earnings call Tuesday, told investors it is reducing its full-year revenue guidance by $8M, in part because of lower revenue growth from its multifamily listing segment. By the market's Wednesday close, the company's stock price had fallen nearly 10%, shaving off billions in its market capitalization.

This dip comes as the apartment market has reached new highs. The U.S. apartment absorption rate this year has been three times the historic 20-year average, and annual apartment rent growth has reached 12.4%, its highest point in two decades, according to CoStar data CEO Andy Florance cited on the earnings call. 

Apartment owners in the past have kept their buildings stabilized at around 93% occupancy to allow for new leasing that can raise rents, but occupancy now averages 95%, Florance said, according to a Motley Fool transcript. Florance added that 12.5% of U.S. investment-grade apartment buildings are currently 99% leased or more. 

"When a community becomes 99% leased, they may love Apartments.com but decide they can lower their advertising level with us," Florance said. "They want to continue a presence on our marketplace, but they do not need hundreds of leads a month with zero or one apartment available."

Florance said that thousands of communities have reduced their level of spending with Apartments.com, including a small number of them that have cut spending by over 50%. 

This is even the case with Apartments.com's largest client, which Florance discussed on the earnings call but declined to name. He said he spoke with the client last month at a National Apartment Association conference and the client praised Apartments.com as its No. 1 source of leads and its most important partner, but still said it was cutting its advertising spending because of the high occupancy levels. 

"While he was thanking us profusely, his firm is reducing their spending level with us over the past few months by about 5% because many of his communities were so full," Florance said. 

Florance said he expects the client will grow its investment in the platform again in the coming years, and he expects its overall advertising revenue will recover after what he described as an "anomaly."

He cited an August survey the firm conducted of 20,000 apartment renters that found 24% plan to renew their current lease, compared to 47% before the coronavirus pandemic, and he said this signals that apartment buildings will experience turnover in the coming quarters and will need to spend money on advertising. 

"In the year to come, we believe there will be unusually high unit turnover, and clients will want a steady lead flow during this great migration," Florance said. 

One major landlord in CoStar's hometown of D.C. told Bisnow it has reduced its advertising spending with Apartments.com for some of its properties. 

WC Smith Vice President Samantha Branchaud, who works on the property management team for the firm with over 11,000 units in its management portfolio, said its approach to advertising has changed over the past year.

For some buildings that had consistently retained high occupancy before the pandemic, it had never needed to advertise on listing platforms, but last year vacancy increased and WC Smith decided to put some properties on Apartments.com for the first time. She said it is looking to keep those properties on the platform to help with exposure, and in some cases may buy advertisements to promote the listings, but some properties don't need the help. 

"In other cases where we were purchasing ad words or more premium ad spaces on Apartments.com, we have in some cases decided to scale back just because we’ve reached higher occupancy levels and don’t feel the ads have been as necessary," Branchaud said. "If we can ever save and still maintain occupancy, we try to be as lean as we can be."

Companies cutting back on advertising has depressed revenue for CoStar's multifamily listings platforms, but those only represent one arm of the company's commercial real estate data empire, and the others have continued to grow. 

CoStar Group, which also owns commercial listing platform LoopNet, auction platform Ten-X, hotel data provider STR and its own CoStar Suite for commercial real estate data, experienced overall year-over-year revenue growth of 17% in the third quarter. It said strong revenue growth from its CoStar platform has helped to offset the lower-than-expected multifamily revenue.